Floating-rate loan re-amortization is the recalculation of a loan’s payment at each rate reset so the new payment amortizes the current balance over the remaining schedule at the new rate; SOFR index tracking is the capture of the loan’s index (Term SOFR, a SOFR average, or compounded SOFR in arrears) under the loan’s lookback and business day conventions. Together they determine what the borrower pays each month and what the balance is on any date. Most internal models get the spread right and the mechanics wrong, and the error compounds monthly.
Which SOFR
Loan documents specify one of several rates, and they are not interchangeable:
- Term SOFR (1-month or 3-month), a forward-looking rate published by CME, set at the start of the period. The most common on agency and bridge loans since the LIBOR transition.
- 30-day average SOFR, published by the New York Fed, backward-looking.
- Daily simple or compounded SOFR in arrears, calculated over the interest period with a lookback, common on bank loans.
The document also specifies the floor (often 0% to 1%, sometimes higher on recent debt fund loans), the observation date (typically two business days before the period start), rounding, and fallbacks. See SOFR in the glossary.
The reset mechanics
For an interest-only floater, the reset changes interest: balance times (index plus spread) times the daycount fraction for the period. Daycount is usually actual/360, which matters: a 31-day month costs more than a 30-day month at the same rate.
For an amortizing floater, and in particular for agency floaters, the reset changes the amortization schedule. The new payment is the level payment that amortizes the current balance over the remaining amortization term at the new rate. Each month, the principal component is the payment less interest at the new rate. A spreadsheet that fixed the amortization schedule at closing will show a different balance from the servicer within a few resets, and the gap widens as rates move.
Business day adjustments (modified following, preceding) shift payment dates and, on some loans, the interest period, which changes the daycount fraction.
Why this matters beyond the payment
- Balance. Every prepayment calculation, covenant test and SREO uses the balance. A drifted balance propagates.
- Interest projection. Budgeting interest for the year requires the forward curve applied under the loan’s conventions.
- Hedge settlements. Cap payments are calculated on the same index and period; the hedge and the loan should reconcile to each other. See hedge requirements.
- DSCR. Debt service in a covenant test is the actual payment, which resets monthly, or a hypothetical at a stressed rate. See DSCR and debt yield tests.
- Rate exposure. Portfolio fixed-versus-floating and sensitivity to a 100 basis point move depend on getting each loan’s index, floor and cap right.
A worked example: three resets, two schedules
A $20 million Freddie Mac floater, 30-day average SOFR plus 210, 30-year amortization, actual/360, payment on the first, observation two business days before the period.
Reset 1. SOFR average 3.66%. All-in 5.76%. The re-amortized payment on $20,000,000 over 360 months at 5.76%: $116,900. Interest for a 31-day period: $20,000,000 x 5.76% x 31/360 = $99,200. Principal: $17,700. Ending balance $19,982,300.
Reset 2. SOFR average 3.81%. All-in 5.91%. Re-amortized payment on $19,982,300 over 359 months at 5.91%: $118,700. Interest for a 30-day period: $98,400. Principal: $20,300. Ending balance $19,962,000.
Reset 3. SOFR average 3.74%. All-in 5.84%. Re-amortized payment on $19,962,000 over 358 months at 5.84%: $117,900. Interest for a 31-day period: $100,400. Principal: $17,500. Ending balance $19,944,500.
Illustrative example: three resets on the $20 million floater
| Reset | SOFR average | All-in rate | Re-amortized payment | Interest | Principal | Ending balance |
|---|---|---|---|---|---|---|
| 1 (31 days) | 3.66% | 5.76% | $116,900 | $99,200 | $17,700 | $19,982,300 |
| 2 (30 days) | 3.81% | 5.91% | $118,700 | $98,400 | $20,300 | $19,962,000 |
| 3 (31 days) | 3.74% | 5.84% | $117,900 | $100,400 | $17,500 | $19,944,500 |
| Fixed schedule at closing, after three months | 5.76% | $116,900 | $19,946,800 |
The fixed-schedule spreadsheet built at closing at 5.76% shows a payment of $116,900 every month and a balance after three months of $19,946,800. The difference from the servicer after one quarter is $2,300. After three years, several tens of thousands, and every prepayment quote and covenant test on the loan uses the wrong balance. The interest budget for the year is off by the rate path the spreadsheet never saw.
Small numbers per month. The error is structural, and it compounds.
Common mistakes with floaters
- Using the wrong SOFR. Term SOFR and 30-day average SOFR differ by basis points on any given day; the document specifies which.
- Ignoring the observation date. Two business days before the period is not the first of the month.
- Fixed amortization on an agency floater. It re-amortizes at every reset.
- 30/360 on an actual/360 loan. A 31-day month costs more.
- Forgetting the floor. When SOFR is below the floor, the floor is the index.
Reconciling to the servicer
Each month: confirm the index value the servicer used and its observation date, confirm the daycount and period, recompute interest and, for amortizing loans, the re-amortized payment and principal split, and compare the ending balance. Differences are usually the observation date, the floor, or a business day adjustment. Fix the convention, not the number.
Portfolio view
Across a portfolio of floaters: total floating exposure by index, weighted spread, floors in the money, caps in the money, projected interest under the forward curve and under stress, and the next reset dates. See loan portfolio dashboards with real-time rates.
How this looks in LoanBoss
Agency floater amortization is automatic: the loan re-amortizes each month based on the floating reset for the period and ties out precisely with the agencies. Every index, payment convention and business day adjustment is modeled, including different floating indices, daycount conventions and business day adjustments across bridge and construction loans. Live SOFR and Term SOFR feed the calculation daily. Interest projections use the forward curve. Cap settlements are calculated on the same conventions for reconciliation.
Frequently Asked Questions
Our servicer’s balance differs from our spreadsheet by a few hundred dollars. Does it matter?
It will. The difference grows with each reset, and the balance feeds the prepayment quote and the covenant test. Reconcile the convention now.
Do fixed-rate loans need any of this?
Only the daycount and business day conventions. The re-amortization mechanics are a floating-rate issue.
How do floors interact with caps?
The floor sets the minimum index the borrower pays; the cap sets the maximum the borrower effectively pays net of cap receipts. The effective rate is the index bounded by both, plus the spread.
What about loans still referencing LIBOR fallbacks?
Nearly all have transitioned. Any remaining fallback language should be abstracted and confirmed against the servicer’s practice.
Which SOFR does the loan use?
The one the document names, and they are not interchangeable. Term SOFR is the most common on agency and bridge loans since the LIBOR transition; compounded SOFR in arrears with a lookback is common on bank loans.
Key takeaways
- Loan documents specify which SOFR (Term, average, or compounded in arrears), the floor, the observation date, the daycount and the business day convention; none is interchangeable.
- On amortizing floaters, and on all agency floaters, each reset re-amortizes the current balance over the remaining term at the new rate. A fixed schedule drifts from the servicer within a few resets.
- The balance feeds every prepayment quote, covenant test and SREO, so the drift propagates.
- Cap settlements use the same index and period as the loan and should reconcile to it.
- Reconcile monthly: index value and observation date, daycount and period, re-amortized payment and split, ending balance. Fix the convention, not the number.
- At portfolio level, track floating exposure by index, floors and caps in the money, and projected interest under the forward curve and under stress.
Related reading
- Managing agency loans
- Bridge and debt fund loans
- Construction loan draw tracking
- Real-time prepayment calculations
- Floating rate and amortization in the glossary
Yes, that means we automatically re-amortize the loan each month based on the floating reset. And yes, we tie out precisely with the Agencies. That is on loanboss.com because customers asked.
Sources
- Federal Reserve Bank of New York, SOFR and SOFR averages methodology
- CME Group, Term SOFR reference rates
- Fannie Mae and Freddie Mac, floating-rate loan servicing conventions (2026)
- ARRC, recommended conventions for SOFR-based commercial loans